On February 1, 2013, Pearson Corporation became the lessee of equipment under a

Question

On February 1, 2013, Pearson Corporation became the lessee of equipment under a five-year, noncancelable lease. The estimated economic life of the equipment is eight years. The fair value of the equipment was $700,000. The lease does not meet the definition of a capital lease in terms of a bargain purchase option, transfer of title, or the lease term. However, Pearson must classify this as a capital lease if the present value of the minimum lease payments is at least
   $700,000.
   $630,000.
   $624,015.
   $560,000.

which is the answer?

Explanation / Answer

P must classify this as a capital lease, only if the present value of the minimum lease payments at the beginning of the lease tyerm is 90% or more of the fair value of the lease property.

Therefore, to classify the above lease as a capital lease , the present value of the minimum lease payments should be at least $6,30,000 ($7,00,000 x 90%).

Thus, Option with the answer of $6,30,000 is correct.

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